Thursday, November 02, 2006

When is a Dollar Not Worth a Dollar?

Apparently, the answer is: when it's more than five years old, and trying to be used in a developing country. From an interesting story in today's Wall Street Journal:

ANTANANARIVO, Madagascar -- Once a month, Jean Yves, a cabin attendant on an Italian cruise ship, gets in line at the purser's office to collect his pay -- seven $100 bills.

If he's lucky, the bills will indeed be worth $700 when he arrives in port and tries to spend them. If he isn't, they'll be worth closer to $600. The difference? The good bills are new ones that bear Treasury Secretary John W. Snow's signature. The bad ones are signed by Treasury Secretary Robert E. Rubin.

...In many countries, from Russia to Singapore, the dollar's value depends not just on global economic forces that move international currency markets, but also on the age, condition and denomination of the bills themselves. Some money changers and banks worry that big U.S. notes are counterfeit. Some can't be bothered to deal with small bills. Some don't want to take the risk that they won't be able to pass old or damaged bills onto the next person. And some just don't like the looks of them.

Okay, I'm not too sure that the last factor has much to do with the discount on older US currency, since I'm sure if it were just a matter of taste for some people who don't like the looks of the older currency, then there would be others who would be willing to trade in the "unattractive" currency anyway to make some money. But still, the phenomenon is interesting.

By the way, it's also worth noting that suspicion of older notes in developing countries is a perfectly rational thing to do, if the circulation of counterfeit bills is much more common in those countries. No one wants to be the last one holding a fake bill, after all. Which is why those currency traders in the developing world may be among the greatest beneficiaries of the new and more counterfeit-proof bills introduced in the US in recent years.

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The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)